As far as televisions are
concerned, I think the citizens of the first world can be divided into two
classes of people.

The first class, the largest
by far, simply loves TV and can’t spend more than a day or two in its absence
without experiencing massive withdrawal symptoms. The second class, vastly
smaller in number, views televisions as the opiate of the masses, gradually
dumbing down the populaces until they are utterly incapable of thinking for
themselves.

I am proud to be a
card-carrying member of the second class. My favorite use for televisions is
target practice at the shooting range. As such, I watch very little television
on a regular basis outside of my sorry addiction to the doomed series “The
X-Files”, which thankfully ends in about six weeks. I do keep a television in
my office tuned to CNBC during trading hours, muted of course, so I can glance
up and see the real-time tickers and breaking business news, but even the mere
idea of sitting down everyday and actually focusing my attention on watching TV
turns my brain into mush.

This week, however, I was very
pleasantly surprised to catch the second two-hour installment of the six-hour
series on PBS called “Commanding Heights: The Battle for the World Economy”. It
is an incredibly well-produced documentary on the real-world struggle between
central-planning socialist economic doctrines and free-market capitalist
philosophies.

This second installment, to
which my father graciously alerted me, was called “The Agony of Reform” and
documented the tremendous failure of government-controlled centrally-planned
economies in the 1980s. I sat entranced for two hours of gloriously
commercial-free public television and eagerly soaked up the spectacular
documentary. And now I sure know what I am doing next Wednesday night, when
part three airs! If you can tolerate two whole hours of TV next week, you
should consider catching it too.

Watching how the
horribly-flawed and morally-repugnant doctrines of socialism imploded in the
real world under their own bloated weight in the 1980s was exceedingly
interesting. (A Communist is simply a Socialist with a gun in a hurry!) As I
digested the excellent documentary and pondered it afterwards, I couldn’t help
but think of the marvelous metal of gold.

In a true free-market
environment, the bane of the existence of freedom-hating socialists everywhere,
gold forms the foundational monetary cornerstone of the economy and it helps
prevent governments from engaging in giant tax-and-spend schemes, socialism in a
nutshell. Socialists seek to brazenly steal the fruits of the labors of the
productive, take a sizeable cut for themselves like parasites, and then give the
remainder to the unproductive in order to subsidize their dysfunctional
unproductive behavior to foster political dependency. The whole twisted idea is
the worst kind of demented lunacy, and gold can deliver it a fatal blow.

Gold is the mortal enemy of
all who want to control the free markets and bend them to their own dark wills,
whether they were Communist central planners in the old Soviet Union or today’s
Alan Greenspan and his secretive politburo of private bankers in the US
shamelessly centrally planning short-term American interest rates.

Gold, if a nation respects it
and bases its currency on the Ancient Metal of Kings, kills socialism and
socialist interventions in free markets dead. If a government can’t print fiat
paper money and is forced to use a solid gold-backed currency, it can’t spend
more than it earns, annihilating socialism as its nefarious roots are choked
off. It is a beautiful thing!

The longer that I study market
and economic history, the more I believe that true freedom can only thrive and
grow in an economy with an honest gold or hard-asset based currency. The
wonderful documentary on PBS brilliantly showed how unimaginably mighty
grass-roots entrepreneurial forces are unleashed if a government simply leaves
its citizens alone and makes sure their money is sound and is not highly
inflationary. On the contrary side of the coin, as soon as a socialist
government controls a nation’s printing presses and magically declares that
formerly worthless paper is suddenly “money”, just because they say so, watch
out.

Anyway, as I marveled at the
brilliant second installment of “Commanding Heights” on Wednesday night, which
was not even about gold at all but the mortal struggle between free markets and
socialism, I decided to write on the current trends of gold and gold stocks this
week.

This essay is the spiritual
progeny of “GoldTrends”,
an essay I wrote last July on the same topic. We envision the GoldTrend series,
which will have future installments periodically as the
Great Commodities Bull of the
00’s continues to unfold, as a strategic overview of the current technical
situation in gold and gold stocks.

Today the primary strategic
“GoldTrend” continues to be breathtaking, a picture-perfect textbook
representation of the early stages of what is probably the long-awaited new bull
market in gold.

Is this a beautiful chart
formation or what?

In early 2001, gold’s
strategic downtrend stealthily morphed into a strategic uptrend so quietly that
few investors even noticed it. We are now over a year into this new uptrend and
it is still gaining steam. It is super-exciting for investors as it is the
first major strategic uptrend in gold in over
six years, since 1996! As
I continue to watch this chart slowly evolve on a daily basis, it is even
gradually replacing our notorious
NASDAQ 1929 graph as my
new personal favorite chart.

Gold’s gorgeous new uptrend,
having just celebrated its first birthday on April 2nd, is technically
rock-solid. As the chart illustrates, gold has cleanly bounced between its
trend pipe’s bottom support and top resistance lines several times now. This
kind of consistency and longevity is a dream for technical analysts who happen
to be bullish on the wondrous metal of gold.

Technical analysis alone,
basically attempting to divine the scattered chicken entrails on price charts,
is of questionable value when viewed as an end in itself in complete isolation
from the rest of the world. We have witnessed this truth in spades recently as
stock technicians continue to be mercilessly slaughtered in droves by the NASDAQ
bust, their blood running red and staining the trading floors. But, when
prudent technical analysis is used to enhance sound fundamental analysis, a very
powerful and compelling analytical force is unleashed.

This gold chart is beautiful
not simply because it is technically appealing, but because it is occurring in
gold which happens to have stellar bullish fundamentals. As far more gold is
being demanded around the world each year than is being chiseled out of the
bowels of the earth, the crucial supply and demand fundamentals for gold are
awesome. In addition to its fantastic economic supply and demand fundamentals,
gold is still overwhelmingly trapped in the hellish investor-psychology realm of
black fear.

As contrarian investors, we
are richly rewarded with the most fun and profits by investing in arenas that
95% of today’s investors wouldn’t touch with a ten-foot pole at the moment.
Gold languishes in these psychological nether realms, still much maligned and
almost universally loathed by investors, even though more and more gold
investors are starting to marvel at the same strategic gold uptrend that we
are. All great bull markets in history start this way, with a tentative subtle
yet solid uptrend in an environment with massive adverse psychological headwinds
quenching already parched general investor enthusiasm.

In addition to glowing
strategic accolades, gold’s current tactical trading situation is also
exceedingly interesting, as the chart shows.

Note that after each of the
two previous times when gold slammed into its top resistance line in the past
year, marked by the white arrows above, that it quickly collapsed back down all
the way through its entire trend pipe, approaching its bottom support line.
Much of gold’s recent uptrending price action occurred in the bottom half of its
trend pipe.

Recently, however, gold has
curiously broken this past mold and has been trading exclusively in the top half
of its strategic uptrend pipe. Gold has bounced off its top resistance line not
once but twice in 2002 already, and so far neither time has been followed by a
precipitous plunge to gold’s bottom support line as we witnessed twice in 2001.
This provocative change of tactical trend behavior for gold is very encouraging
and potentially quite bullish.

In 2001, both significant gold
spikes to resistance were very sharp and short-lived, on temporary potentially
gold-positive news developments. The first big 2001 gold spike occurred after
the GATA African Gold Summit
in May and the second
following the September 11th fiery veto of imperial Washington’s
hyper-interventionist foreign policy. Both gold spikes almost immediately faded
after touching the top trend line, however, as the chart above clearly shows.

In 2002, both significant gold
spikes (or the single Janus-headed big one, depending on how you prefer to slice
up your chart stalagmites) so far have not rapidly crashed back down to the
floor of gold’s uptrend pipe. This great new tactical behavior by gold provides
some initial evidence that something potentially big has changed in the gold
markets, that there is steady gold investment buying on no news rather than
occasional fleeting spikes on headline events or rumors.

My partners and I are
encouraged to witness this provocative new tactical behavior by the gold price
thus far in 2002. While it is too early to know for sure, if definitely feels
like something is up. I still suspect that the most likely candidate for the
apparent large surge in gold investment demand is Japan, as I elaborated about
in an essay a couple months ago called “The
New Japanese Gold Rush”. Although none of us have traveled to Tokyo
recently to investigate with our own eyes, we continue to see stories all over
the international financial media about big surges in Japanese gold investment
demand.

In order to attempt to find
some hard data to test the Japanese gold hypothesis for explaining the recent
change in gold’s tactical price behavior, we did grab the latest official Tokyo
Commodity Exchange (TOCOM) gold futures
trading data and updated a graph from February’s “The New Japanese Gold Rush”
essay. The results were interesting.

As private Japanese investors
choose to buy gold, they have to buy from retail shops which in turn buy the
physical gold bullion from wholesalers. Many of the Japanese gold wholesalers
use TOCOM gold futures to buy gold to fulfill their own demand. As such,
eventually grassroots Japanese investment demand for gold should filter into
TOCOM gold data in the form of rising futures prices, higher trading volume, and
higher open interest. Has it yet?

The left axis below represents
the price of gold for Japanese investors in yen per gram. The yen gold price is
graphed in dark blue. The right axis outlines the TOCOM gold futures daily
trading activity. The light blue line is open interest, or the total number of
gold futures contracts outstanding for all maturities at TOCOM. The white
columns represent daily TOCOM gold futures trading volume for all maturities.
Unlike the 100-ounce COMEX gold futures contracts traded in the States, in Japan
TOCOM’s gold futures contracts each represent a kilogram of gold, about 32
ounces.

Although the yen gold price
has stabilized at higher levels around Y1275 per gram since the recent enormous
surge in TOCOM gold trading volume and open interest in February, the frenzied
gold futures trading volume has dropped significantly. The massive white volume
spike above has crumbled down to below 100k contracts traded per day, far below
the peak of 341k reached on February 7th. Still, since March 1st the average
daily trading volume has been 99k contracts, far above the average daily gold
trading since 2000 of 44k contracts.

Even though trading volume has
been slowing since February, we are amazed at the continuing strength in TOCOM
gold futures open interest (OI), the number of outstanding gold contracts of all
maturities. While open interest did back off a bit to below 400k contracts
after the February buying frenzy, it is still running 359k contracts, quite high
in the context of the last couple years. Since March 1st OI has averaged 386k
contracts, an incredible 51% higher than the average OI since 2000 of 256k.
Current gold futures TOCOM OI, on no significant gold news, is remaining stable
at levels approaching even the huge surge of gold flight-capital activity
surrounding the tremendous uncertainty of the millennial date changeover of Y2k.

With continuing strong open
interest in gold futures in Tokyo, the new Japanese love affair with gold
certainly appears to be more than just a fleeting infatuation and could be the
very bleeding edge of further increasing gold investment demand in the Land of
the Rising Sun. If this hypothesis proves correct, it is very bullish for
future global gold prices.

When this hard TOCOM data is
viewed in the light of proliferating anecdotal reports of surging private
Japanese gold investment demand and continuing justifiable fears over the
solvency of Japan’s entire decaying banking system, we can make a pretty solid
assumption that the Japanese are not yet finished buying gold. I still believe
that there is a significant probability that the primary reason that gold
continues to hover around $300 on the global markets is because Japan continues
to eagerly soak up all the excess gold which the Western central banks are
willing to generously dump at such historically low gold prices. Interesting
times!

In summary, gold’s strategic
uptrend is absolutely gorgeous and a beautiful sight to behold shortly after its
first birthday. Gold remains near the top of its trend channel around $300,
probably at least partially because the average Japanese investor has started to
rediscover the timeless virtues of gold.

The gaping maw of gold’s
strategic trend pipe is roughly defined between $280 and $310 at the moment, as
is readily apparent in the first graph above. If gold falls back to the bottom
of its trend to $280 in the coming weeks, have no fear. Gold trading anywhere
within its glorious new uptrend, high or low, is a beautiful sight to behold and
a bounce to and journey around support is no reason to fret. $280 gold is just
fine within this current trend context. If gold falls under trend and trades
well below $280 for a few weeks, however, then is the time to carefully rethink
gold’s price activity. For now, no worries!

Conversely, don’t be concerned
if gold doesn’t explode up to $325 instantly. Long and methodical bull markets
unfolding over many years and then climaxing in a spectacular bubble over a few
months are the most rewarding for long-term investors. Careful, plodding,
relentless uptrend activity in gold is vastly healthier than highly-disruptive
limit-up daily $75 gold spikes in a short-covering frenzy that collapses soon
afterwards. A quiet but perpetually advancing gold market provides the greatest
opportunities for long-term gains as it eliminates extreme volatility that can
whipsaw investors out of their positions and cause great angst.

With my thoughts on the
strategic and tactical GoldTrends in the bag for this installment, I would like
to briefly discuss another graph that we created this week. Typically, we
produce several times as many graphs each week as actually appear in these
essays, so sometimes it is hard
to decide which ones to include for commentary. As most gold investors choose
to partially play the new gold bull market via gold stocks as a leveraged proxy
on the gold price, I thought it was appropriate to throw in this new gold stock
graph as well.

It is simply a comparison
graph of the underdog American Stock Exchange Gold BUGS (Basket
of Unhedged
Gold
Stocks)
Index (symbol HUI) versus the far more popular Philadelphia Stock Exchange Gold
and Silver Index (symbol XAU)
since 2000. I find this graph so interesting because it really drives home the
crucial gold investing point of the massive relative performance delta between
unhedged gold stocks fully exposed to the new gold rally and hedged gold stocks
which have sold away their shareholders’ upside exposure to the gold price to
bullion bankers.

The HUI, unhedged gold stocks,
is graphed in the red columns and the white trend lines apply to it. The XAU,
crippled by a vast overweighting in mega-hedgers, is shown by the blue line.

Trough to peak, the popular
XAU is up an impressive 72.8% from its low of 41.85 on November 17, 2000. Not a
bad return if you can find it eh? Especially in a brutal supercycle
post-bubble-bust bear market in general stocks that is just starting to finally
show some real teeth. For a chilling comparison the perpetually-adored NASDAQ
has returned -41.6% (yes, that’s a loss) since the same day of November 17,
2000. The mindless multitudes of unthinking drone zombie tech investors can
take that to the bank!

While the XAU results look
compelling at first glance, they are utterly annihilated by the vastly superior
performance of the HUI!

The HUI, which reached its
dark bottom of 35.99 on November 14, 2000 just days before the XAU, has rocketed
up by a spectacular 184.5% in 17 months! I don’t care where you usually invest,
this is a staggeringly stellar return for any investor!

The XAU and its less well
known cousin the HUI are both gold stock indices, but the HUI has returned
111.7% more than the XAU over the exact same time frame with an identical
backdrop of the early days of the new strategic uptrend in gold. Stated another
way, XAU investors had an enormous opportunity cost of more than half of their
potential returns simply because they chose the XAU over the HUI. What gives?

The only real fundamental
difference between the two indices is that the XAU is dominated by mega-hedger
gold companies and the HUI only accepts unhedged gold stocks fully exposed to
the gold price. The performance of the XAU over the last 17 months has been
relentlessly dragged down by the huge gold hedgers Barrick Gold (ABX) and
AngloGold (AU) acting like unwelcome sea anchors. These mega-hedgers currently
constitute 38% of the total weight of the XAU and had even more influence last
year before the newly created super Newmont (NEM, a non-hedger) reached its full
girth early this year after digesting Australia’s Normandy Mining and Canada’s
Franco Nevada.

Gold hedging companies cut
deals with private bankers that lock in future gold prices they will receive for
their gold. If gold rallies significantly, the mega-hedgers’ shareholders lose
huge amounts of profits in opportunity costs as the hedgers are contractually
obligated to sell gold for a lower price than where it is trading in the spot
markets. Mega-hedging companies, which I define as having sold forward more
than one year’s worth of future gold production, have sold most of their upside
profits in future gold rallies to third parties, effectively nefariously looting
their shareholders of the gains properly due them from a rising gold price.

Savvy investors fully
understand this Faustian deal with the devil that the mega-hedgers have inked
with their shareholders’ own blood so they avoid these companies like the plague
and instead reward nonhedgers with their scarce capital. The price activity in
both the mega-hedged and unhedged gold realms tells the whole story.

For instance, the most
notorious of the mega-hedgers, Barrick Gold (ABX), is up 33.7% since November
15, 2000, which does not look too bad on the surface in the midst of a miserable
equity bear market. Gold Fields (GOLD) on the other hand, a world-class
unhedged gold mining company of similar annual gold production to Barrick, has
rocketed up by 289.3% over the same period!

Hmmmm… 34% or 289%? Decisions
decisions! Now one certainly doesn’t have to be Warren Buffet to decide whether
investing in mega-hedger gold companies or unhedged gold companies is the
superior capital deployment decision in a rising gold price environment! The
monstrous “hedging penalty” that shows up in the flaccid stock prices of the
mega-hedgers is incredibly torturous and punishing for gold investors foolish
enough to invest in these companies directly or indirectly.

If you are investing in gold
stocks because you expect a gold rally, buying mega-hedgers, either directly or
through a mutual fund, is just like shooting yourself in the foot. I still
can’t even begin to fathom why any investor on earth who is bullish on gold
would place his or her scarce capital at risk in mega-hedgers who have sold away
their shareholders’ upside profits to future gold rallies. It makes no sense at
all.

I also have no idea why
supposedly savvy mutual fund managers stake large positions in these
mega-hedgers when huge and highly-liquid quality unhedged alternatives like
Newmont (NEM) and Gold Fields (GOLD) are available for investment. Don’t they
do any research? Prudent diversification across continents and companies in the
gold sector can be easily achieved by investing in world-class unhedged gold
companies and avoiding the mega-hedger dogs entirely. If you own gold mutual
funds and they have a material position (>5% stake) in a mega-hedger, you ought
to consider moving your capital elsewhere to a better-managed gold fund.

Gold mega-hedgers are only a
quasi-logical investment if you think the gold price is going way lower, but
then they are still a quite goofy investment in a very real sense because, if
you believe gold is headed lower, why invest in gold-related stocks at all? If
an investor is bearish on gold, it is best to avoid the sector altogether, not
buy the hedgers who do better in a gold bear market!

The bottom line?

Gold is in a simply gorgeous
strategic uptrend that is already a year old and shows no signs of running out
of steam yet, partially no doubt thanks to private Japanese investors. Gold’s
beautiful uptrend is a picture-perfect start to what will probably prove to be a
magnificent multi-year bull market in the long-languishing Ancient Metal of
Kings.

If you are a fellow gold bull and think the gold price is heading
higher, and your preferred way to speculate on this probability is to buy gold
stocks, avoid the mega-hedgers like the Black Death. The legendary gains in the
coming gold rallies will only be achieved in unhedged quality gold stocks fully
exposed to the gold price.